2019 (3) TMI 560 - AT - Income Tax

Disallowance of survey, testing and drawing expenses treating the same in the nature of preliminary expenses u/s 35 - above expenses were incurred before the commencement of the project - HELD THAT - Findings of learned CIT(A) are quite exhaustive. The learned CIT(A) has rightly deleted the addition by holding that assessee was already into business and therefore, disallowance was not warranted u/s 35D of the Act. The learned CIT(A) has rightly observed that expenses were incurred by assessee on its construction projects in which the assessee was already engaged. Excess expenditure claimed on project completed and handed over to client - Whether AO made addition in absence of documentary evidences to prove the justification of expenses claimed? - CIT(A) has deleted the same holding, that there is no dispute that the expenditure had been incurred, and in real estate there is always a possibility of project cost being over run out price escalation and delay in project - HELD THAT - CIT(A) has dealt with the issue exhaustively and has rightly deleted the addition which the Assessing Officer had wrongly made. We agree with the findings of learned CIT(A) that the expenditure cannot be disallowed merely because the expenses incurred actually were more than the budgeted expenses when the expenditure has actually been incurred and recorded in the books of accounts which have been subjected to multiple audits. Addition on account of excess loss claimed on projects - absence of complete documentary evidence for claiming of loss - CIT-A deleted the addition and held that since the income has not been accrued to the assessee, it cannot be charged to tax in the hands of the assessee - HELD THAT - Findings of learned CIT(A) are quite exhaustive. The learned CIT(A) has rightly deleted the addition which the Assessing Officer had wrongly made. The learned CIT(A) has rightly relied on the case laws where the Hon ble court had held that where the amount of interest on central grants has to be remitted back to Government for the same cannot be treated as income of the assessee Addition of interest income received from the FDR s and SB accounts in the name of the assessee - assessee claimed TDS deducted by the bank on interest which is against the provision of section 198 and 199 - CIT(A) has deleted the same holding, that the funds granted to the assessee corporation were to be utilized for a particular purpose and in absence of the same being utilized for specific purpose, the same is to be refunded back to the Government with interest accrued thereon - HELD THAT - The addition made by the Assessing Officer has been wrongly deleted by the CIT(A). No doubt, the funds have to be returned back to the Government alongwith the interest accrued thereon, yet since the FDRs are in the name of the assessee corporation the interest would belong to the assesseee and the Assessing Officer has rightly taxed the same and therefore the same be upheld. Non deducting TDS on freight expenses, material supplied and labour charges - disallowance u/s 40(a)(ia) - CIT(A) has discussed the different heads of expenditure incurred by the assessee and has held, that out of the total disallowance of ₹ 54,15,933/- only disallowance of ₹ 4,08,525/- and ₹ 5,70,000/- having made without deduction of TDS, is to be disallowed under section 40(a)(ia) - HELD THAT - CIT(A), while dealing with the additions made under different heads, has reproduced a chart and has dealt with each issue in detail and has rightly deleted the addition which the Assessing Officer had wrongly made. We find that relying on a number of case laws he has rightly held that for a shortfall in deduction of tax at source, an assessee cannot be said to assessee in default and therefore, cannot be subjected to disallowance u/s 40(a)(ia) of the Act. We find no infirmity in the findings of learned CIT(A). Addition of excess expenditure - AO made addition in absence of documentary evidence to prove the justification of expenses claimed - CIT(A) has held that these payments include payments which have been rectified and reversed in financial year 2013-2014 relevant to assessment year 2014-2015 or are the payments which relate to final settlement after receipt of proper bills in case where the expenditure in earlier years was recorded in the books of accounts on estimate basis - revenue neutral - HELD THAT - Findings of learned CIT(A) are quite exhaustive. The learned CIT(A) has held that these payments include payments which have been rectified and reversed in financial year 2013-2014 relevant to assessment year 2014-2015 or are the payments which relate to final settlement after receipt of proper bills in case where the expenditure in earlier years was recorded in the books of accounts on estimate basis. His findings, that in case the expenditure is disallowed, the proper course would be to reduce the work in progress by equivalent amount and therefore, would be revenue neutral are, correct. We find that learned CIT(A) has rightly deleted the addition which the Assessing Officer had wrongly made. Addition of short computation of WIP - CIT(A) has deleted the same holding, that the expenses are neither excess nor non-related to business. However, the CIT(A) has upheld the addition to the extent of ₹ 1,22,575/- as against ₹ 5,71,922/-. - HELD THAT - CIT(A) has rightly restricted the addition to ₹ 4,49,347/- as against ₹ 5,71,922/- which the Assessing Officer had made. We find no infirmity in the findings arrived at by learned CIT(A). Nature of expenditure - expenditure on the renovation of building including civil work - revenue or capital expenditure - CIT-A deleted part addition holding, that the repair and maintenance to the building are in the nature of current repairs - HELD THAT - CIT(A) has held that the expenditure of ₹ 3,48,062/- has been incurred on construction of a new guard room which gives rise to a capital asset of enduring nature and the addition of ₹ 18,58,061/- made by the Assessing Officer was restricted to ₹ 3,48,062/- giving relief of ₹ 15,09,999/- to the assessee. We find no infirmity in the findings arrived at by learned CIT(A). Addition u/s 43B of the Act in the absence of any documentary evidence of payment - CIT(A) has restricted the disallowance - HELD THAT - CIT(A) has dealt with the issue exhaustively and by reproducing a chart of all the heads where the disallowance has been made u/s 43B, the learned CIT(A) has dealt with all the heads separately and given a detailed finding and wherever the addition was required to be upheld, he has upheld the same. Finding no infirmity in his order, we confirm the order of learned CIT(A) on this issue. Addition on account of prior period expenses not deductable in mercantile system of accounting - CIT(A) has deleted the same holding, that the nature of the work of the assessee is that of running of continuous work in progress - HELD THAT - We agree with the findings of learned CIT(A) that the assessee had filed complete details of expenditure before the Assessing Officer and the impugned expenditure crystallized in the year under consideration. The expenditure accrues in the year in which it crystallizes. Moreover, corresponding income in the shape of Work-in-Progress and percentage of Centage has been charged in the assessment year under consideration. Disallowance of such expenditure in the current year will result in reducing the corresponding work-in-progress and centage and therefore, the effect is revenue neutral. As such we find that learned CIT(A) has rightly deleted the addition Non deducting TDS on POL of hired vehicles and TDS at the leser rate of 2% - disallowance u/s 40(a)(ia) - CIT(A) has deleted the same holding, that the tax at source was deducted wherever the same was applicable and that no deduction of TDS is required to be made on expenses incurred on petrol and diesel and these expenses were borne by the appellant - HELD THAT - The assessee has deducted TDS @2% wherever the payment was in excess of specified limit of ₹ 20,000/- on payments made for hiring of vehicles. No deduction is required to be made on expenses incurred on petrol and diesel as these were borne by the assessee. While deleting the addition, learned CIT(A) has relied on the order of the Cochin Bench of the Tribunal in the case of M/s Three Star Granites (P) Ltd. Versus ACIT., Cir. 1 (1) Thrissur - 2014 (4) TMI 1058 - ITAT COCHIN - ITAT COCHIN. Revenue recognition - addition for not following percentage completion method - AO made an addition of ₹ 21,20,09,287/- on account of Percentage Completion Method - AS-7 - HELD THAT - CIT(A) has dealt with the issue exhaustively and has observed that as per system of accounting consistently being followed by the assessee while accounting for the income of a project as per requirements of AS-7(Revised), when the stage of completion of a project is more than 50% and less than 100% the assessee recognizes 2/3 of the profit and on completion of work the entire profit is accounted for. Thus, in respect of those works which were more than 50% completed in earlier years, 2/3 of the profit thereon or in respect of projects completed in subsequent years, the entire profit stands accounted for and has been offered for taxation or actually assessed by the assessing officer. Further, the statutory auditors have not taken exception or qualification to creation of reserve and the C&AG of India have also not given any adverse comment on this issue. We find ourselves in agreement with the findings of learned CIT(A) on this issue. Short deduction of tds - disallowance u/s 40(a)(ia) - CIT(A) has deleted the same holding, that no doubt there was short deduction of tax, but short deduction of tax itself would not be the cause for disallowance - HELD THAT - CIT(A) has observed that the short deduction of tax cannot be a reason/basis for disallowance under section 40(a)(ia) of the Act. The learned CIT(A) has rightly relied on a number of case laws for the proposition that in case of short deduction of tax, disallowance u/s 40(a)(ia) cannot be made. Finding no infirmity in the order of learned CIT(A), we confirm the same on this issue. Non deduction of TDS on the payments covered u/s 194C - addition on account of labour charges - CIT(A) has deleted the same holding, that since no expenditure was incurred by the assessee on transportation of material, which was borne by the suppliers themselves, the assessee was under no obligation to deduct tax at source - HELD THAT - CIT(A) has observed that no transportation charge is borne by the assessee and the assessee does not make any payment to the transporters and the payment is made to suppliers for purchase of goods. The question of any TDS being deducted by the assessee on the goods purchased thus does not arise. No such disallowance has been made by the Assessing Officer in earlier years also when payment for purchases was made without deduction of TDS. Finding no infirmity in the order of learned CIT(A), Addition on account of loss against disposal of stock - CIT-A deleted the addition as observed that the assessee had sold old unusable stock which were purchased in earlier years - HELD THAT - The loss is the value of the stock as per the books of accounts and the amount realized of sale thereof which was disallowed by the AO. In the present case, the Assessing Officer determined whether the stock of old unusable items sold was rightly sold or not. We also find that the loss has been suffered on sale of old stock in the course of business of the assessee and is allowable under the Act. Addition u/s 68 - CIT-A deleted the addition - HELD THAT - CIT(A) has observed that the assessee, during the course of assessment proceedings, had filed confirmation of balances of creditors to whom notices were issued under section 133(6) of the Act by the Assessing Officer. These creditors relate to normal business transactions and credit has been given to these trade creditors for contract work done by them and payments are being made to the parties by cheques. The transactions resulting in income from contract work done by them have been accepted by the Assessing Officer and therefore, there is no justification in addition of the closing balances appearing in their accounts in the books of accounts of the assessee particularly as the balances stand confirmed. Revenue appeal dismissed.

Summary

Issues Involved:
1. Disallowance of survey, testing, and drawing expenses.
2. Excess expenditure claimed on completed projects.
3. Excess loss claimed on projects.
4. Interest income from FDRs and SB accounts.
5. Disallowance under section 40(a)(ia) for non-deduction of TDS.
6. Excess expenditure without documentary evidence.
7. Short computation of Work in Progress (WIP).
8. Capital expenditure claimed as revenue expenditure.
9. Disallowance under section 43B.
10. Prior period expenses.
11. Disallowance under section 40(a)(ia) for POL of hired vehicles.
12. Non-following of percentage completion method for revenue recognition.
13. Short deduction of TDS.
14. Disallowance under section 40(a)(ia) for payments covered under section 194C.
15. Acceptance of revised computation of income.
16. Loss against disposal of stock.
17. Addition under section 68 for verification of creditors.

Issue-wise Analysis:

1. Disallowance of Survey, Testing, and Drawing Expenses:
The Assessing Officer (AO) treated these expenses as preliminary under section 35D, but the CIT(A) held that since the assessee was already engaged in construction, these were revenue expenses. The Tribunal upheld CIT(A)’s view, noting that the business was ongoing, and expenses were related to construction projects.

2. Excess Expenditure Claimed on Completed Projects:
The AO disallowed the excess expenditure due to lack of documentary evidence. CIT(A) deleted the addition, stating that cost overruns are common in construction and expenses were recorded in audited books. The Tribunal agreed with CIT(A), emphasizing that actual expenditures were incurred and recorded.

3. Excess Loss Claimed on Projects:
The AO disallowed the loss due to insufficient evidence. CIT(A) deleted the addition, noting that expenses were incurred and recorded in audited books. The Tribunal upheld CIT(A)’s decision, confirming the legitimacy of the expenses.

4. Interest Income from FDRs and SB Accounts:
The AO added interest income from FDRs and SB accounts, but CIT(A) deleted the addition, citing a government order that such interest belongs to the government. The Tribunal agreed, referencing similar cases where interest on government funds is not taxable for the assessee.

5. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The AO disallowed expenses for non-deduction of TDS. CIT(A) provided relief, noting specific instances where TDS was not required or was deducted at a lower rate. The Tribunal upheld CIT(A)’s detailed findings, referencing case laws supporting non-disallowance for short TDS deductions.

6. Excess Expenditure Without Documentary Evidence:
The AO disallowed excess expenditure. CIT(A) deleted the addition, explaining that these payments were rectified in subsequent years and were revenue-neutral. The Tribunal upheld CIT(A)’s decision, confirming the rectification and revenue-neutral nature of the expenses.

7. Short Computation of WIP:
The AO added for short computation of WIP. CIT(A) gave partial relief, adjusting for excess amounts recorded elsewhere. The Tribunal upheld CIT(A)’s findings, confirming the corrected computation.

8. Capital Expenditure Claimed as Revenue Expenditure:
The AO disallowed certain expenses as capital expenditure. CIT(A) provided partial relief, distinguishing between repairs and capital assets. The Tribunal agreed with CIT(A), confirming the nature of expenses as repairs.

9. Disallowance under Section 43B:
The AO disallowed various statutory liabilities. CIT(A) deleted most additions, noting payments made before the due date or non-applicability of section 43B. The Tribunal upheld CIT(A)’s detailed findings, confirming the legitimacy of the payments.

10. Prior Period Expenses:
The AO disallowed prior period expenses. CIT(A) deleted the addition, stating that expenses crystallized in the current year and were revenue-neutral. The Tribunal agreed, confirming the timing and nature of the expenses.

11. Disallowance under Section 40(a)(ia) for POL of Hired Vehicles:
The AO disallowed expenses for non-deduction of TDS on POL. CIT(A) deleted the addition, noting that TDS was deducted on hire charges, and POL expenses were borne by the assessee. The Tribunal upheld CIT(A)’s decision, referencing supporting case laws.

12. Non-Following of Percentage Completion Method for Revenue Recognition:
The AO added for not following the percentage completion method. CIT(A) deleted the addition, explaining the assessee’s consistent accounting policy. The Tribunal agreed, confirming the legitimacy of the accounting method.

13. Short Deduction of TDS:
The AO disallowed expenses for short TDS deduction. CIT(A) deleted the addition, referencing case laws that short TDS deduction does not warrant disallowance under section 40(a)(ia). The Tribunal upheld CIT(A)’s decision.

14. Disallowance under Section 40(a)(ia) for Payments Covered under Section 194C:
The AO disallowed expenses for non-deduction of TDS on purchases. CIT(A) deleted the addition, noting that transportation costs were borne by suppliers, not the assessee. The Tribunal agreed, confirming the non-applicability of TDS on purchases.

15. Acceptance of Revised Computation of Income:
The AO rejected the revised computation of income. CIT(A) directed acceptance, noting the revised computation was based on audited accounts. The Tribunal upheld CIT(A)’s decision.

16. Loss Against Disposal of Stock:
The AO disallowed the loss on stock disposal. CIT(A) deleted the addition, explaining the loss was legitimate and incurred in the course of business. The Tribunal agreed, confirming the legitimacy of the loss.

17. Addition under Section 68 for Verification of Creditors:
The AO added for unverified creditors. CIT(A) deleted the addition, noting confirmations from creditors and the nature of transactions. The Tribunal upheld CIT(A)’s decision, confirming the legitimacy of the creditors.

Conclusion:
The Tribunal upheld CIT(A)’s decisions on all issues, confirming the legitimacy of expenses, accounting methods, and deductions claimed by the assessee. All appeals by the Revenue were dismissed.